'Angela Merkel wasn't thinking much about Europe when she made her coalition deal.' Photograph: Sean Gallup/Getty Images

The long delayed formation of a new German government this week ought to be a pivotal moment of opportunity for our part of the world. Angela Merkel scored a personal triumph in the 2013 general election and has never been politically stronger. The grand coalition between Merkel's CDU-CSU Christian democrats and the SPD social democrats, now at last in place in Berlin, has an overwhelming majority in the Bundestag. No other significant nation in the current EU has both a strong economy and a strong government – certainly not France, clinging to the past and teetering on the brink of a new recession. Not Britain either, we should note.

The stage ought therefore to be set for a strong and broadly based new Merkel government to lead Germany and Europe on a new and more purposeful course. Some of us have tried from time to time to persuade ourselves that this may indeed now happen – that a third-term Merkel government might shake off the cautious, just-in-time approach that her earlier governments brought to the task of dealing with Europe's shared but unsolved problems. We also speculated optimistically that an alliance with the SPD might provide the reassurance both for a bipartisan, reforming approach to Germany's own economic problems and for a less deflationary, austerity-driven approach to those of Greece, Spain and, Portugal and the rest of the eurozone.

Parochial optimism about the opportunities created by Merkel's win has also been quietly in evidence among Britain's pro-Europeans and, in particular, in 10 Downing Street. He won't say it in public, but David Cameron continues to hope that the Merkel alliance is the key to Britain remaining a member of the EU. Cameron is hopeful that an ever-pragmatic Merkel will somehow help him to construct a plausible offer that a re-elected Tory premier can put to the British people in a referendum in 2017 with a good prospect of winning the vote to stay in the EU.

The trouble with such speculations is that they are largely wishful thinking, with few facts to back them up. We do indeed inhabit the Merkel era. But the German chancellor doesn't do daring. She has dominated in the past by cautious pragmatism, and there is every reason to suppose she will continue to dominate in the future by just the same means. For reasons that include German history, coalition politics, the chancellor's own character and the sheer difficulty of persuading all 28 EU member states to adopt a common approach, the Merkel era is likely to remain an era of expediency.

The new government's 185-page coalition agreement underlines that approach. Merkel may be the one European leader who from to time has actually faced Germans and Europeans with the devastating syllogism that Europe has 7% of the world's people, who possess 25% of the world's wealth and award themselves 50% of the world's social spending – with the clear (and surely correct) implication that a globalised economy and the rise of China make this hard to sustain without reform. But she is also the leader who, in the post-election coalition negotiations, willingly gave the SPD all the extra social spending and benefits that the social democratic chair, Sigmar Gabriel, insisted, probably correctly, would be necessary to ensure his party voted for a coalition that many of its members think is against their interests.

As a result, many of the larger questions facing Germany and Europe – and so also facing Britain – were once again fudged. In particular, the ever-growing demographic squeeze on Germany caused by the combination of low birth-rates and higher life expectancy – by 2060, one German in three will be 65 or over – was not just ignored but compounded in the negotiations. In the same week George Osborne announced Britain's latest increase in the UK retirement age in his autumn statement, the German coalition negotiators agreed to cuts in the retirement age for long-serving workers and increased pensions for older mothers, all of which will have to be paid for by those who remain in work.

Germany's current-account surplus means that the new government can afford to make these changes. Germany's somewhat more positive general attitude to the migration that comes in its wake helps too – a stark contrast to the press-driven, Ukip-fuelled anti-migrant panic in Britain. Even so, all this has a back-to-the-future feel, especially from the SPD, which seems increasingly determined to write Gerhard Schröder's Agenda 2010 reforms out of its history as a Blairite aberration. It also goes in the opposite direction to the welfare, salary and jobs cuts that Germany has been instrumental in inflicting on other EU nations, and will inevitably open Germany to the charge that it expects others to give up security that is being strengthened for its own citizens. The braver course would have been to cut the eurozone a bit of slack and to grip EU-wide banking reform more firmly. But that did not happen.

None of this suggests that Merkel was thinking much about Europe when she made her coalition deal. In one sense this is hardly a surprise, so there is no point being too indignant about it. Yet it should be recognised that it comes at a high price for Europeans, because only Germany has the weight to reform Europe in a sensible and balanced way that reflects the seriousness of globalisation's long-term economic challenge to the European tax and social welfare model – which we all share, whether or not we remain part of the EU.

None of this is good news for Cameron or for those who want Britain to remain committed to an EU that delivers economic benefits and security for its citizens. Merkel's strategy for the British vote is by no means as clear as some in London would like to think. For one thing, Britain, with its infinitely solipsistic political culture and its tendency to lecture and denigrate Europe, as usual does itself few favours in the contest for the chancellor's ear. London's panic-driven anxiety to attack the right to freedom of movement for EU citizens does nothing to suggest the UK is a reliable long-term partner in a reformed EU project.

Moreover, Merkel is a politician with other audiences to please. Like every other EU head of government meeting in Brussels today for their latest summit, she is a national politician, not a pan-national one. Even at the height of the eurozone crisis, it is said, Merkel rarely spent more than 40% of her working time on European matters. Today that figure is put at 10%. It may be tempting to want to think of Merkel as the re-elected Frau Europa. But, unless she shows otherwise, the larger reality is that she is the re-elected Frau Deutschland.